Liu Zhongtian – A Magnet for Controversy

The Chinese aluminium magnate Liu Zhongtian has been busy over the past several months. His latest move, namely his firm’s purchase of US firm Aleris, came as a shock to many in the market for a variety of reasons. Zhongwang USA LLC, an investment company owned by China Zhongwang’s parent company Zhongwang International Group Ltd, set a record for the highest price ever paid by a Chinese firm for a United States metals producer, tendering US$1.1 billion for the Cleveland-based concern.

Bringing Aleris into the Zhongwang family earns them a “complementary business foothold,” according to Liu, the billionaire founder and president of China Zhongwang. The purchase adds fourteen extrusion plants, five thousand employees, and an annual revenue of approximately US$3 billion. Zhongwang also takes title to Aleris’s Kentucky plant, which is currently undergoing a US$400 million expansion in order to better meet global demand for aluminium automotive parts.

However, the purchase may attract the attention of the Committee on Foreign Investment in the U.S., which is a committee of the Treasury Department that reviews foreign investments in United States assets. Although CFIUS is prevented from discussing information about specific cases, the committee may well recommend that the deal be blocked on account of national security reasons, as Aleris supplies aluminium plate to the United States military.

Zhongwang and its chief Liu’s colorful financial past have also raised questions regarding the appropriateness of the Aleris deal. At Zhongwang’s IPO at the Hong Kong Stock Exchange in spring 2009, the firm’s stock skyrocketed, eventually becoming the world’s biggest IPO that year after raising US$1.26 billion. The gains were short lived, as a mainland newspaper pointed out the fact that customers listed in Zhongwang’s IPO prospectus had not ordered from the firm in 2008. Although the firm engaged Ernst & Young to confirm a portion of the transactions mentioned in the prospectus, the damage had been done by that point, as the stock eventually dropped to half its initial value at the time of the IPO.

The firm encountered further trouble last summer when a report by Dupré Analytics accused Zhongwang of fraud. According to the short seller, the Liu family has allegedly been siphoning off funds from Zhongwang since 2011. The report went on to say that Zhongwang took out HK$36.5 billion to buy its own products via firms whose ownership was ultimately traced back to Liu, thereby inflating sales figures. Dupré estimated that up to 62.5 percent of Zhongwang’s revenues since 2011 were in some way obtained by fraudulent means.

The Dupre report also went on to describe a complex and sizable trade in fake aluminium semis allegedly conducted by Zhongwang. According to Dupré, Zhongwang has transferred HK$16.3 billion of semi-fabricated aluminium to a warehousing and remelting facility in Guanajuato, Mexico. At the time, photos showing up to 850,000 metric tons of stockpiled aluminium being warehoused at the site, which is owned by Aluminicaste Fundición de México S. de RL de CV, were circulated by industry media outlet American Metal Markets (AMM). Although Zhongwang denies a direct connection to Aluminicaste, the allegations of its engagement in the fake-semi trade, coupled with Dupré’s report detailing alleged financial fraud, prompted Zhongwang to temporarily suspend trading of its stock on the Hong Kong exchange shortly after the allegations came to light.

The allegations have not gone away, either. Earlier this summer export data showed a tremendous jump in aluminium exports from Mexico to Vietnam. According to data from the Mexican Secretariat of Economy, the country exported 162,851 metric tons of aluminium to Vietnam in June, good for a 91.5% increase from May, when it sent 85,059 metric tons of the metal. Mexico sent 247,910 metric tons of aluminium to Vietnam in just those two months, which is over eight thousand times more aluminium than the country sent all of last year (30.4 metric tons).

In addition to the above data, AMM obtained new photos in early August apparently showing almost three dozen trucks assembled outside of the plant, alongside several stacks of aluminium. AMM’s sources told the outlet that, as the American market was not showing interest in the stockpile, the firm was shipping it off to Vietnam. Zhongwang maintained its denial of involvement in the fake-semis trade.

As evidence mounted that Zhongwang was actively engaged in marketing fake semis, the United States government moved to initiate an investigation. In March of this year, The Aluminum Extruders Council filed a Circumvention and Scope Clarification case with the United States Commerce Department against aluminum producer Zhongwang, saying that the supplier is evading taxes by selling semi-finished aluminium in place of aluminium ingots. The Commerce Department agreed, finding a “sufficient basis to initiate an anti-circumvention inquiry.” Although Zhongwang continued to insist upon its innocence, telling Aleris that it has been cooperating with the Commerce Department’s investigation, many in the aluminium industry remain unconvinced.

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